Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 24

Activity-Based Costing of Customers

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.2 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.5 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities:

Activity	Cost Driver	Cost	Driver Volume
Using ATM&	Number of uses	$750 000	10,000,000 uses
Visiting branch	Number of visits	2,250, 000	750 000 visits
Processing transaction&	Number of transactions&	1500 000	40,000 000 transactions
Managing functions. .&	Total deposits	3000 000	$187,500 000 in deposits
Total overhead &		$7500 000

Data on two representative customers follow:

	Customer A	Customer B
ATM uses	200	250
Branch visits	5	20
Number of transactions	40	1,500
Average deposit	$200	$6,000

Required

a. Compute RSB&T’s operating profits.

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b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.5 percent of deposits; operating costs are 4 percent (= $7,500,000/$187,500,000) of deposits.

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c. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.

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Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Cost allocation

Role of cost allocation comes into play when common cost needs to allocated to two or more products or departments. There different basis used for cost allocation like number units used, labors hours, area used by departments or products etc. Cost allocation base must be the one that best establishes the connection between the overhead incurred and the activity. Cause and effect basis can be effective way to identify cost allocation base.